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Starling Bank is exploring plans to buy another UK lender, an overhaul to its business model that would allow the digital bank to put its £12bn worth of customer deposits to more profitable use.
The fintech is actively looking at several acquisition options that would allow it to expand its lending capacity and deploy deposits into areas that could generate higher returns, such as corporate lending, according to two people familiar with the discussions. One said the acquisition could be “substantial” in scale.
The acquisition is part of an effort by the fintech to diversify its income. Currently, Starling customer deposits are either held at the Bank of England collecting interest, invested in securities such as bonds, or channelled into mortgage lending through Fleet, a small lender that Starling bought in 2021.
John Cronin, an independent bank analyst, said Starling “has struggled to grow its loan book commensurate with the size of its deposit book”. He said Starling’s latest set of accounts showed that £4.7bn worth of its £12.1bn deposits were net loans, which was lower than peers.
Starling has thought about growing its capacity organically but has decided that an acquisition would be faster, according to the people familiar with the situation.
Starling declined to comment.
The neobank, which was founded in 2014 by former Allied Irish Banks executive Anne Boden, has been tied to an acquisition before. In April, Sky News reported that Shawbrook, the SME lender, had approached Starling about a potential combination, but no deal emerged.
One person familiar with the business said Starling was not eyeing up mergers but acquisitions of a mixture of cash or cash and shares.
Starling was previously criticised by the government’s former anti-fraud minister, Lord Theodore Agnew, for expanding its lending during Covid-19. The neobank built out a large portfolio of loans from the government-backed “bounce back loans”, which were issued by banks to support struggling businesses quickly during the pandemic.
This grew to become a significant chunk of Starling’s lending book, but it announced in May that it was setting aside £28mn to cover loans that may not have complied with the lending scheme’s requirements. The UK financial regulator fined Starling in 2024 for “shockingly lax controls” against financial crime during its expansion from 2017 to 2023. The bank said it had since invested heavily in strengthening its controls.
Starling has also built software called Engine, which allows lenders to design and build their own digital capabilities. The software, which Starling believes will be key to growth, is already being used by a bank in Australia and another in Romania. Last month, Starling announced that it had signed Canada’s Tangerine Bank as its latest Engine customer.
Starling is also weighing up buying a bank in the US to accelerate its global expansion, the Financial Times has previously reported. The plans could also include a US initial public offering. Part of the ambition is to plug Engine into an American bank and attract more local customers.
Raman Bhatia, the group’s chief executive officer, told the FT’s Global Banking Summit last week that Starling was also open to buying a European business in the next three to five years to further boost expansion.
Starling acquired in August the accounting software start-up Ember, which it hopes to provide to its small-business customers. “We have focused on high-quality acquisitions but now we want to turbocharge that engine in the UK so there is so much to do here in terms of market share and growth expansion,” said Bhatia at the FT’s banking summit.